New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<ul><li>NZME Limited (NZM) is an integrated media company with operations across three divisions: Audio, Publishing, and OneRoof. The group's two trophy assets are The NZ Herald, anchoring its Publishing division as NZ's leading masthead, and its Newstalk ZB radio station as part of its Audio assets.</li><li> OneRoof, NZM's real estate arm, offers comprehensive property insights, services, and classified advertising.</li><li>The digital transition across these platforms continues. NZM is navigating the challenges well, relative to peers, albeit with more required to compete against global competitors. </li></ul>

NZME Limited (NZM) is an integrated media company with operations across three divisions: Audio, Publishing, and OneRoof. The group's two trophy assets are The NZ Herald, anchoring its Publishing division as NZ's leading masthead, and its Newstalk ZB radio station as part of its Audio assets. OneRoof, NZM's real estate arm, offers comprehensive property insights, services, and classified advertising.The digital transition across these platforms continues. NZM is navigating the challenges well, relative to peers, albeit with more required to compete against global competitors. 

NZME Limited - Navigating Media's Digital Wave

<h2>NZME</h2>
FY19 Result — Could There Be a Silver Lining?
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127&nbsp;
RESEARCH&nbsp;INSIGHTS
Although we do not expect the structural decline in&nbsp;NZME's&nbsp;(NZM) print revenue to cease, there may be cause for greater optimism than what its share price is implying.&nbsp;NZM&nbsp;continues to find cost savings.&nbsp;Radio delivered revenue growth for the first time in five years, with a notable acceleration in the 2H. Property listings (NZM's&nbsp;largest advertising segment) are improving, trailing the notable improvement in demand.&nbsp;Digital initiatives (OneRoof,&nbsp;paywall) have made initial (albeit still incremental) progress. Cash flow has been strong and been used to lower debt. And&nbsp;NZM&nbsp;is optimistic that it may reach&nbsp;a (sensible and pragmatic) solution with Government to overcome the Commerce Commission's (CC) concerns around media plurality (diversity of views/publications), and enable it to buy Stuff.&nbsp;
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">NZM</td>
<td style="width: 48pt;">Financials:Dec/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$0.35</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">17.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">15.6</td>
<td style="text-align: left; width: 43.2pt;">14.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.0&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">2.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.1</td>
<td style="text-align: left; width: 48pt;">2.1</td>
<td style="text-align: left; width: 42.6pt;">2.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">196.0m</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">8.7</td>
<td style="text-align: left; width: 42.6pt;">8.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">7.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.6</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">4.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.3</td>
<td style="text-align: left; width: 48pt;">4.6</td>
<td style="text-align: left; width: 42.6pt;">5.7&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$68.6m</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-10.7</td>
<td style="text-align: left; width: 42.6pt;">-8.4</td>
<td style="text-align: left; width: 43.2pt;">-10.2</td>
<td style="text-align: left; width: 48pt;">-21.7&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">4.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">60.7k (NZ$29k)</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">2.2&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">4.2</td>
<td style="text-align: left; width: 42.6pt;">2.0&nbsp;</td>
</tr>
<tr>
<td></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.3</td>
</tr>
<tr>
<td></td>
<td style="width: 48pt;"></td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.7&nbsp;</td>
</tr>
</tbody>
</table>
Remains dominated by the structural decline in print ...
Unsurprisingly, the structural decline in print, coupled with some cyclical softness in advertising, dragged NZM's revenue down another -4%. Opex down -4% limited the EBITDA decline to -7% yoy. Whilst it is creditable that NZM's print revenue remains more resilient than the broader market, this provides little comfort when it still represents c.50% of NZM's total revenue and the pace of decline accelerated to -9% (the fastest drop in three years). An improvement in the property market may see the gradient flatten in FY20, but (as the share price is clearly telling us) the downward trend remains inevitable.
... but there are some silver linings ...
Given the size of the print business, it defines the trajectory of&nbsp;NZM's&nbsp;headline earnings. Beneath the headline there have been areas of positive progress:
<ul type="disc">
<li>Radio delivered the first revenue growth, up +2%, in five years, including an acceleration to +5% in the 2H.&nbsp;</li>
<li>NZM&nbsp;launched NZ Herald digital subscriptions, and now has 46k subscribers (21k digital + 25k activated&nbsp;print subs). Revenue remains modest, NZ$1.7m in its first eight months.&nbsp;</li>
<li>Online real estate site&nbsp;OneRoof's&nbsp;audience and listings continue to grow. Revenue is also only incremental&nbsp;at NZ$2.8m, and along with motors site DRIVEN,&nbsp;NZM's&nbsp;classifieds initiatives contributed&nbsp;an&nbsp;EBITDA&nbsp;loss of NZ$(3.9)m.&nbsp;</li>
<li>Free cash flow was strong through the period, reducing net debt by NZ$24m to NZ$75m. Debt reduction (appropriately in our view) remains a focus.&nbsp;</li>
</ul>
... and most materially, Stuff back on the table
In 2017 the CC rejected a&nbsp;proposed&nbsp;NZM-Stuff merger. A key&nbsp;concern was the impact on&nbsp;media plurality (diversity of views). Stuff owner Nine Entertainment has subsequently failed to find a buyer for the company.&nbsp;Political comments suggest&nbsp;possible Government receptiveness to a "Kiwi Share" arrangement, which would ensure newsroom independence within a merged entity for a set period of time. We believe a merger would (1) deliver material synergy benefits, but&nbsp;(2) need to be supported by new equity within&nbsp;NZM.&nbsp;&nbsp;

NZME
FY19 Result — Could There Be a Silver Lining?
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127&nbsp;
RESEARCH&nbsp;INSIGHTS
Although we do not expect the structural decline in&nbsp;NZME's&nbsp;(NZM) print revenue to cease, there may be cause for greater optimism than what its share price is implying.&nbsp;NZM&nbsp;continues to find cost savings.&nbsp;Radio delivered revenue growth for the first time in five years, with a notable acceleration in the 2H. Property listings (NZM's&nbsp;largest advertising segment) are improving, trailing the notable improvement in demand.&nbsp;Digital initiatives (OneRoof,&nbsp;paywall) have made initial (albeit still incremental) progress. Cash flow has been strong and been used to lower debt. And&nbsp;NZM&nbsp;is optimistic that it may reach&nbsp;a (sensible and pragmatic) solution with Government to overcome the Commerce Commission's (CC) concerns around media plurality (diversity of views/publications), and enable it to buy Stuff.&nbsp;
         


NZX Code
NZM
Financials:Dec/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$0.35
NPAT* (NZ$m)
17.0&nbsp;
15.6
14.0&nbsp;
11.0&nbsp;
EV/EBITDA
2.4&nbsp;
2.1
2.1
2.4&nbsp;


Issued shares
196.0m
EPS* (NZc)
8.7
8.0&nbsp;
7.1&nbsp;
5.6
EV/EBIT
4.5&nbsp;
4.3
4.6
5.7&nbsp;


Market cap
NZ$68.6m
EPS growth* (%)
-10.7
-8.4
-10.2
-21.7&nbsp;
PE
4.0&nbsp;
4.4&nbsp;
4.9&nbsp;
6.3&nbsp;


Avg daily turnover
60.7k (NZ$29k)
DPS (NZc)
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
2.2&nbsp;
Price/NTA
n/a
n/a
4.2
2.0&nbsp;




Imputation (%)
100
100
100
100
Cash div yld (%)
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
6.3




*Based on normalised profits


Gross div yld (%)
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
8.7&nbsp;



Remains dominated by the structural decline in print ...
Unsurprisingly, the structural decline in print, coupled with some cyclical softness in advertising, dragged NZM's revenue down another -4%. Opex down -4% limited the EBITDA decline to -7% yoy. Whilst it is creditable that NZM's print revenue remains more resilient than the broader market, this provides little comfort when it still represents c.50% of NZM's total revenue and the pace of decline accelerated to -9% (the fastest drop in three years). An improvement in the property market may see the gradient flatten in FY20, but (as the share price is clearly telling us) the downward trend remains inevitable.
... but there are some silver linings ...
Given the size of the print business, it defines the trajectory of&nbsp;NZM's&nbsp;headline earnings. Beneath the headline there have been areas of positive progress:

Radio delivered the first revenue growth, up +2%, in five years, including an acceleration to +5% in the 2H.&nbsp;
NZM&nbsp;launched NZ Herald digital subscriptions, and now has 46k subscribers (21k digital + 25k activated&nbsp;print subs). Revenue remains modest, NZ$1.7m in its first eight months.&nbsp;
Online real estate site&nbsp;OneRoof's&nbsp;audience and listings continue to grow. Revenue is also only incremental&nbsp;at NZ$2.8m, and along with motors site DRIVEN,&nbsp;NZM's&nbsp;classifieds initiatives contributed&nbsp;an&nbsp;EBITDA&nbsp;loss of NZ$(3.9)m.&nbsp;
Free cash flow was strong through the period, reducing net debt by NZ$24m to NZ$75m. Debt reduction (appropriately in our view) remains a focus.&nbsp;

... and most materially, Stuff back on the table
In 2017 the CC rejected a&nbsp;proposed&nbsp;NZM-Stuff merger. A key&nbsp;concern was the impact on&nbsp;media plurality (diversity of views). Stuff owner Nine Entertainment has subsequently failed to find a buyer for the company.&nbsp;Political comments suggest&nbsp;possible Government receptiveness to a "Kiwi Share" arrangement, which would ensure newsroom independence within a merged entity for a set period of time. We believe a merger would (1) deliver material synergy benefits, but&nbsp;(2) need to be supported by new equity within&nbsp;NZM.&nbsp;&nbsp;

NZME: FY19 Result — Could There Be a Silver Lining?

<h2>NZME</h2>
1H19 Result — Slow News Day
We saw little in NZME’s (NZM) 1H19 result that would materially shift investor sentiment either way. Major themes are unchanged: the sharp fall in print persists, NZM continues to do a commendable job lowering costs, and progress in digital initiatives (classifieds, paywall) is incremental, but nowhere near enough for investors to start ascribing any material value. We see little near-term that will shift the market from pricing NZM as a business in structural decline.
What’s changed?
<ul>
<li>Earnings: Changes to our operating earnings principally reflect the adoption of IFRS16. Underlying changes have been modest.</li>
</ul>
Revenue down on structural and cyclical impacts
NZM’s 1H19 revenue, down -4%, reflected both the continued structural decline in print, down -7%, and cyclical softness in advertising spend. A -3% reduction in opex (predominantly labour) provided some insulation; however, the leverage through to underlying EBITDA -15% and NPAT -16% was still considerable.
Once again NZM’s print business was significantly more resilient than the broader market, with its ad revenue down -8% vs. the market -14%. Radio revenue ticked higher (just), still positive given it has been in decline for (at least) the past four years. Digital advertising was soft, down -8%, in line with NZM’s view of the market.
Progress in digital initiatives has been incremental
NZM is focussed on cultivating digital revenues. Its real estate site OneRoof has progressed since its launch in March last year. The audience has grown — weekly unique browsers up +33% in June 2019 vs. Dec. 2018, but the revenue contribution, whilst improving, remains modest at NZ$1.3m vs. 2H18 NZ$0.7m. Revenue from the other classified properties is negligible. In April NZM launched NZ Herald digital subscriptions, and now has &gt;15k subscriber which equates to revenue of c.NZ$3m pa (1H NZ$0.2m). On a run-rate basis these currently total c.1.5% of NZM’s revenue, and make a net EBIT loss of c.NZ$3–4m. They remain a fair distance from the level where investors will start to consider whether they can materially add to value of NZM.
Cyclically improved 2H expected, but structural pressures unchanged
NZM painted a picture of a more positive 2H on the back of cyclically improving advertising demand — to date 3Q advertising bookings are up +6% yoy. For the full year it is targeting the (pre IFRS16) analyst consensus of EBITDA NZ$50m (consistent with our now IFRS16 adjusted forecast). Whilst this would be welcome, we do not expect a cyclical boost will alter the structural decline being priced by the market. The company’s policy changes last year — dividend cut, focus on debt reduction, investment in digital initiatives (and away from cash flow harvesting) — lengthened the period over which investors must consider NZM, not an easy proposition given current declining profile of earnings.&nbsp;&nbsp;&nbsp;
<div class="content-highlight">
Investment View
NZM is inherently&nbsp;high risk with a broad range of potential value outcomes dependent on the gradient of the (inevitable) print decline, the resiliency of radio, the company’s ability to structurally lower its fixed cost base, and the success of its digital initiatives.&nbsp;We see little near-term that will shift the market from pricing NZM as a business in structural decline.
</div>
Matt Henry, CFA
matt.henry@forsythbarr.co.nz
+64 9 368 0115

NZME
1H19 Result — Slow News Day
We saw little in NZME’s (NZM) 1H19 result that would materially shift investor sentiment either way. Major themes are unchanged: the sharp fall in print persists, NZM continues to do a commendable job lowering costs, and progress in digital initiatives (classifieds, paywall) is incremental, but nowhere near enough for investors to start ascribing any material value. We see little near-term that will shift the market from pricing NZM as a business in structural decline.
What’s changed?

Earnings: Changes to our operating earnings principally reflect the adoption of IFRS16. Underlying changes have been modest.

Revenue down on structural and cyclical impacts
NZM’s 1H19 revenue, down -4%, reflected both the continued structural decline in print, down -7%, and cyclical softness in advertising spend. A -3% reduction in opex (predominantly labour) provided some insulation; however, the leverage through to underlying EBITDA -15% and NPAT -16% was still considerable.
Once again NZM’s print business was significantly more resilient than the broader market, with its ad revenue down -8% vs. the market -14%. Radio revenue ticked higher (just), still positive given it has been in decline for (at least) the past four years. Digital advertising was soft, down -8%, in line with NZM’s view of the market.
Progress in digital initiatives has been incremental
NZM is focussed on cultivating digital revenues. Its real estate site OneRoof has progressed since its launch in March last year. The audience has grown — weekly unique browsers up +33% in June 2019 vs. Dec. 2018, but the revenue contribution, whilst improving, remains modest at NZ$1.3m vs. 2H18 NZ$0.7m. Revenue from the other classified properties is negligible. In April NZM launched NZ Herald digital subscriptions, and now has &gt;15k subscriber which equates to revenue of c.NZ$3m pa (1H NZ$0.2m). On a run-rate basis these currently total c.1.5% of NZM’s revenue, and make a net EBIT loss of c.NZ$3–4m. They remain a fair distance from the level where investors will start to consider whether they can materially add to value of NZM.
Cyclically improved 2H expected, but structural pressures unchanged
NZM painted a picture of a more positive 2H on the back of cyclically improving advertising demand — to date 3Q advertising bookings are up +6% yoy. For the full year it is targeting the (pre IFRS16) analyst consensus of EBITDA NZ$50m (consistent with our now IFRS16 adjusted forecast). Whilst this would be welcome, we do not expect a cyclical boost will alter the structural decline being priced by the market. The company’s policy changes last year — dividend cut, focus on debt reduction, investment in digital initiatives (and away from cash flow harvesting) — lengthened the period over which investors must consider NZM, not an easy proposition given current declining profile of earnings.&nbsp;&nbsp;&nbsp;

Investment View
NZM is inherently&nbsp;high risk with a broad range of potential value outcomes dependent on the gradient of the (inevitable) print decline, the resiliency of radio, the company’s ability to structurally lower its fixed cost base, and the success of its digital initiatives.&nbsp;We see little near-term that will shift the market from pricing NZM as a business in structural decline.

Matt Henry, CFA
matt.henry@forsythbarr.co.nz
+64 9 368 0115

New Zealand

NZME Limited provides printing and publication services. The Company offers services of newspapers and magazines, as well as commercial printing and specialist publications.

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